Skeptical bond market means tougher choices for universities

Nov. 12, 2013

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The Enquirer in 2013 is examining the sustainability of a college system in which tuition, student debt and costs are increasing, leading to fears that higher education could be the nation’s next economic bubble to burst.

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Universities across the region are getting ready to borrow millions of dollars more for their newest campus projects.

But the bond market is souring on higher education nationally, putting at risk the easy borrowing universities have enjoyed for decades.

“People never really gave much thought to whether those bonds were going to be repaid or not, because there were never any defaults,” said David Creamer, the top finance official at Miami University. “No one’s assuming that’s true any longer.”

College bond sales are part of a completely different market than a decade ago, with ratings agencies now bluntly warning that overspending and “prolonged muted revenue growth” will force universities to change their business models.

The effect is even more dramatic in this part of the country, with the supply of high school graduates expected to shrink by 10 percent or more during the next decade.

Yet despite the national concerns, local universities haven’t stopped tapping the bond market.

For example:

• The University of Cincinnati wants to sell $93 million in bonds next month for an expansion of Nippert Stadium. The plan is for money from donors and ticket buyers to pay off the debt.

• Northern Kentucky University will use student fees and dorm charges to pay back $53 million in new bonds to expand the student recreation center and turn a vacant senior housing complex the university recently bought into a dorm.

• Miami wants to build more dorms but will likely wait until late 2014 before borrowing more money after it sold $125 million in bonds in October 2012.

• Xavier University might refinance some of its $196 million in outstanding debt that helped it build a business school and the biggest dorm on campus.

Maintaining top credit rating can affect tuition costs

Balance sheets and ratings reports don’t get a lot of attention from families who are struggling to pay tuition.

But they are a critical factor in universities’ ability to build new student unions and dorms while keeping tuition increases to a minimum

A higher credit rating means lower interest payments.

It also means the flexibility to borrow money when it’s needed.

“For us to have anything other than a top-notch credit rating would be unthinkable,” said Dennis Repenning, chairman of the NKU Board of Regents.

“The real big picture is to provide the best available education at the lowest possible price.”

To keep their credit ratings intact, universities are cracking down on their own bottom lines, creating millions of dollars in surpluses a year that they pour into reserves or back into the operation.

That can have consequences on campus.

Xavier, for example, created an operating margin of $1.4 million last year and holds more than $25 million in cash reserves, not including working capital.

It also increased tuition about 3 percent and cut 51 jobs in a mid-year correction after dips in graduate enrollment created a budget gap.

That is the universities’ dilemma: maximize surpluses every year or use that money to create tuition relief for students?

“There’s a balancing act there between many things, including funding new programs,” said Beth Amyot, chief financial officer at Xavier.

“We want to maintain affordability.

“We’re not building that margin at the expense of large tuition increases.”

Across the country, universities are more conscious of their bottom lines and unwilling to endanger it, said Bob Shea, senior fellow for finance and campus management at the National Association of College and University Business Officers.

Those priorities often can override keeping tuition level.

“A well-run financial enterprise, whether it’s a family, a business or a college, has to have reserves,” Shea said.

“Colleges and universities have a lot of different risks.”

Despite uncertain future, local universities get high marks

Those in the strongest position are public universities with a wide base of students and elite private colleges with huge endowments.

At UC, revenue outpaced expenses by $110 million last year, counting money from Ohio taxpayers and including capital projects, investment returns and private donations.

UC was able to use some of that financial strength to freeze in-state undergraduate tuition at $10,784 this year. It also maintained a reserve fund of about $7 million.

In assigning UC a strong rating, Moody’s cited UC’s “market position with solid student demand, philanthropic support and research, as well as a strong management and governance team that has engrained a culture of fiscal discipline to produce modest operating surpluses and grow unrestricted financial resources.”

NKU received similar plaudits from Moody’s, with “expendable financial resources of $117 million providing a healthy cushion to debt and operations.”

But both reports warned that those ratings could be at risk by higher debt at UC or lower subsidies from taxpayers at NKU.

Universities in the most precarious position include private colleges outside the national elite.

Those could find themselves in a downward spiral, spending millions in merit financial aid to compete even more fiercely for a dwindling pool of students, Moody’s said.